Assumptions (by management)
Growth companies that multiply an investor'smoney by 25 times, 100 times, or evenbetween 400 and 600 times—let alone thetruly big companies like Wal-Mart at over 19,000times—have four great characteristics. You canquickly and easily learn how to identify these characteristicsby using common sense.
Why the Win
The acronym BASM (see box) can be a tremendousguide in this process. A business modeldescribes three essential things. How a company willmake high profits, how it will grow those profits fora long time, and how it will protect those profitsfrom competition.
Yahoo and eBay have great BASM, while Amazonneeds more workon its businessmodel, and Googleis a great product,but like manycompanies, suchas Polaroid, and Xerox, and Kodak, needs to supportthe current hot product with a business modelas good as Yahoo's. In other words, a good companynot only develops a great product, but is able toexpand and branch out for years to come, strategicallycultivating new revenue streams.
Every company makes critical assumptions abouthow to approach a market. Bill Gates studied howconsumers and companies would buy software, andonly then applied his assumptions to construct abusiness model, followed by a product strategy. Thatis how he won.
Get in Tune
Physician-investors can recognize BASM by practicinglooking for them. Only read annual reports ofcompanies that clearly show they have great-lookingbusiness models and assumptions about their future.Thus, focus saves much time.
"Know what you own" is the old adage abouthow to hold the wealth stocks or buy more duringbig market swings instead of guessing the marketdirection, which costs people chances to be rich. Forexample, if you don't understand how a tech stockwill make money, don't buy it.
Earnings are the golden eggs that drive stocks overthe long term, but BASM is the golden goose thatlays those golden eggs. Knowing the BASM will savetime and headaches and avoid staying up late to emulatefinancial analysts.
Keep a notebook, and you will be amazed at howquickly you start to identify the BASM and thosewealth stocks, even early-stage companies withoutearnings. It is all the same, whether it is technology,retail, or health care.
Fred Kobrick is the author of The Big Money: Seven Steps toPicking Great Stocks and Finding Financial Security (Simon &Schuster; 2006). A veteran investor and mutual fund manager,Kobrick managed $4.5 billion in assets in mutual funds. He drawson decades of success as a stock-picker. Kobrick's fund achievedone of the five best long-term records in the United States for 15 years, accordingto USA Today, and was selected by Money magazine as one of six "Funds ofthe Decade" in the 1990s. His fund was the only fund to win the USA Today's AllStar Fund of the Year award more than once.